Triple Lock risks the State Pension rising three times faster than prices or earnings – and outpacing working age benefits yet again

The ‘Triple Lock’ is on course to increase the cash value of the State Pension by 7.6 per cent between 2020 and 2022, compared to 2.5 per cent and 1.5 per cent increases in prices and earnings respectively, largely due to the coronavirus crisis causing earnings to fall this year and spike next year, according to a new report published today (Friday) by the Resolution Foundation.

The report, Locked In, considers the outlook for the State Pension as a result of the Triple Lock’s interaction with a tumultuous period for earnings growth over the next two years.

The Triple Lock sees the State Pension rise each April in line with the highest of wage growth (measured by growth in total pay in the Average Weekly Earnings series for the previous May to July), price rises (based on the Consumer Prices Index for the previous September), or 2.5 per cent.

Working-age benefits are uprated in line with CPI in September, though they have been capped or frozen in cash terms for much of the last decade. The result is that while the basic State Pension was 56 per cent higher than the main rate of unemployment benefit in 2014, by 2019 it was 77 per cent higher.

The Foundation notes that while there is much uncertainty around pay growth, the Bank of England is forecasting an unprecedented 2 per cent fall in nominal wages in the current calendar year, followed by a 4 per cent increase next year.

And with the critical May-June period this year covering the peak of furloughing, and severely constrained economic activity, the Foundation’s analysis shows that the Bank of England’s forecasts are consistent with average earnings falling by as much as 3.3 per cent year-on-year during this period.

This low base could see pay rebound by around 5 per cent in May-July 2021 – the highest measured pay growth during this period in 20 years – despite underlying pay growth being very weak.

Such a pay outlook would prompt a 2.5 per cent rise in the State Pension next year (as inflation is forecast to be well below 2.5 per cent) and a 5 per cent increase the year after, giving a two-year increase of 7.6 per cent.

A 7.6 per cent increase would be three times as high as the increase in prices (2.5 per cent) or earnings (1.5 per cent) over the two-year period, and would cost £3bn more in 2022 than if it had kept pace with earnings, and £2.1bn more than if it had kept pace with inflation.

The Foundation says such increases are hard to justify as they stand in stark contrast to both weak earnings growth among the working age-population, and much slower rises for working-age benefits.

This is because the £20 a week boost to the basic rate of Universal Credit this year is set to be reversed next April. The result is that over the two years to 2022, the 7.6 per cent rise in the State Pension would contrast with an 18.9 per cent fall in the value of the main rate of unemployment benefits.

To address these problems the Foundation argues that, at a minimum, the Government should temporarily switch to operating the Triple Lock over the coming two years as a whole, with the State Pension rising by a 5 per cent backstop. This will exceed two-year growth in earnings or inflation.

A better approach would be to permanently uprate the State Pension via a ‘smoothed earnings link’. This would see long term growth in line with earnings, but with temporary protections for years when price rise faster than earnings.

Laura Gardiner, Research Director at the Resolution Foundation, said:

“The Triple Lock was announced a decade ago as a long-overdue move to restore the link between the State Pension and earnings. But while that aim may be laudable, the policy itself is a mess and needs to be replaced.

“As a result of the volatile earnings growth that the lockdown has driven, the Triple Lock will see the State Pension increase by 7.6 per cent between 2020 and 2022. That is at least three times the expected increase in prices or indeed wage rises that workers are likely to see.

“Such a large increase is particularly hard to justify when it will be working-age families feeling the greatest pinch from Britain’s jobs crisis.

“The Government should scrap the Triple Lock and move to a much clearer policy of setting a clear objective for the value of the State Pension, and then holding it there via a smoothed earnings link.”